OREANDA-NEWS. Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) for ConAgra Foods, Inc. (ConAgra) and its subsidiary, Ralcorp Holdings, Inc. (Ralcorp) at 'BBB-' and short-term IDR at 'F3'. The Rating Outlook has been revised to Stable from Negative.

A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Leverage Expected to Reduce to Low 3.0x

The affirmation follows CAG's announcement that it has reached a definitive agreement to sell its private label operations to TreeHouse Foods for approximately $2.7 billion in cash and use the proceeds primarily for debt reduction, in accordance with the company's public statement and goal to maintain strong financial flexibility and an investment grade rating. Assuming ConAgra pays down $2 billion-$2.3 billion in debt, leverage would be 3.0x-3.2x on EBITDA of $1.9 billion in EBITDA (after removing $300 million in EBITDA contribution from the private brand business), versus fiscal 2015 leverage of 3.6x. The transaction is expected to close in the first quarter of 2016.

Business Profile Improves

Profitability in the company's private brands business had been weak with EBITDA margins down more than 500 basis points (bps) to 9% in fiscal 2015 due to a highly competitive bidding environment, combined with service-related issues and execution shortfalls, which had negatively impacted results and near term expectations for volume, pricing and margins. The sale of the private brand business improves pro forma EBITDA for the remaining business to the mid-17% range versus 15.5% in fiscal 2015.

Focus on Core Consumer Branded Business

Fitch has been concerned with both the company's high leverage and its business prospects. This transaction alleviates the former, provides some additional financial flexibility, and removes a distraction such that more focus can be provided to stabilize its core businesses and drive profitable and consistent growth over time with a narrower portfolio.

Volumes in its consumer foods business have been in the negative 1% to 3% range for the last five years, offset by only a modest improvement in pricing/mix effect in the 1% range. While early, revenue growth in consumer brands was nearly flat in the first quarter of fiscal 2016. Modest declines were driven by exiting low margin SKU's however, brand support activities on faster growing SKU's will continue.

The company will need to drive productivity improvements in SG&A, supply chain and trade spending to support future investments in marketing, infrastructure, innovation, and acquisitions. In October 2015, CAG announced that it expects to realize at least $300 million of efficiency benefits within the next three years through a combination of reductions in SG&A and enhancements to trade spend processes and tools.

In addition, similar to its industry peers, the company will have to reposition its branded portfolio over the next few years to exit low to negative growth brands and invest in health and wellness brands given shifting consumer preferences.

As a result, Fitch expects modest volume declines will continue but EBITDA is expected to be flat to modestly higher given a sense of urgency around cost controls. Continued progress on this front will be needed to maintain the Stable Outlook.

Additionally, Fitch anticipates that ConAgra will continue to fine tune its portfolio and the $1.6 billion in capital loss carry-forward from the Private Brands transaction will be a strong enabler.

KEY ASSUMPTIONS
--The Private Brand sale to TreeHouse Foods closes and the company uses approximately $2 billion to reduce debt bringing leverage to low 3.0x range.
--Fitch expects flat to modest volume declines will continue in its core businesses but EBITDA is expected to be flat to modestly higher given cost control initiatives.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--If weak top line and operating trends continue without material offset from debt reduction, such that gross leverage (total debt-to-operating EBITDA) in the low 3.0x range is unsustainable. Deteriorating free cash flow (FCF) or a sizeable leveraged transaction would also support a downgrade.

Future developments that may, individually or collectively, lead to a positive rating action include:
--A positive rating action is not anticipated in the near term unless there are other strategic portfolio shifts that improve the business and its prospects further.
--In the long term, a positive rating action could be supported by substantial and growing FCF generation, consistent positive volume growth in all segments demonstrating that operational issues have been resolved, along with maintaining leverage in the mid-2x range.

LIQUIDITY

Ample Liquidity, Manageable Maturities: ConAgra maintains an undrawn $1.5 billion revolving credit facility expiring Sept. 14, 2018 that provides backup to its commercial paper (CP) program. The company had $114 million in cash at Aug. 30, 2015. The revolving credit facility contains covenants that consolidated debt must not exceed 65% of consolidated capital during the first four quarters commencing Jan. 29, 2014 and the company's fixed charge coverage ratio must be greater than 1.75x on a rolling four quarter basis. ConAgra's long-term debt maturities primarily consist of $1 billion due in fiscal 2016 and approximately $550 million due in fiscal 2017.

FULL LIST OF RATING ACTIONS

Fitch has affirmed ConAgra Foods, Inc.'s ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank credit facility at 'BBB-';
--Subordinated notes at 'BB+';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.

Ralcorp Holdings, Inc.
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.

The Rating Outlook is revised to Stable from Negative.